general partnerships

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Chapter Four

General Partnerships

Business Organizations for ParalegalsReed and Cheeseman

© 2012 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights Reserved.

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Chapter Four – Objectives

1. Define general partnership and describe how general partnerships are formed.

2. Explain the contract and tort liability of partners.

3. Describe how a partnership is dissolved and terminated.



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General Partnership

Voluntary association

Two or more people

Carry on business for profit

Creates rights and duties between partners and

with third parties

General partners personally liable for the debts

and obligations of the partnership.



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General Partnership

Third PartyThird Party

Debt or obligation Debt or obligation owedowedGeneral General

PartnershipPartnership

Capital investmentCapital investment

General General PartnerPartner



Capital investmentCapital investment

Personal liability for Personal liability for partnership’s debts and partnership’s debts and

obligationsobligations



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Uniform Partnership Act (UPA)

Model act Codifies partnership law Most states have adopted Covers most problems that arise in the

formation, operation, and dissolution of ordinary partnerships



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Entity Theory of Partnership

UPA considers partnerships as separate legal entities.

Partnerships can: Hold title to personal and real property Transact business in the partnership name Sue in the partnership name



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General Partnership Name

Can operate under name of any one or all of partners

May use fictitious name Must file fictitious business name certificate Publish notice Cannot be similar to name used by another

business



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Requirements for a General Partnership

UPA states that a partnership is:1. A voluntary association of two or more persons

Includes natural persons, partnerships, corporations

2. Carrying on a business

3. As co-ownersAll partners must agree to participation

4. For profit



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Evidence of Partnership

Prima facie evidence: Receipt of a share of business profits

Compelling evidence: Agreement to share in profits and losses Right to participate in management



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Partnership Agreement

May be written or oral Statute of Frauds applies

No formalities required Recommended that it be in writing

Called partnership agreement or articles of partnership

UPA will fill gaps



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Rights Among Partners

Unless otherwise agreed, each partner: Has a right to participate in management,

and Has an equal vote on partnership matters.

Under UPA, a simple majority decides most ordinary partnership matters.



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Partners’ Rights to Share in Profits

UPA mandates right to an equal share in profits and losses

Agreements often provide otherwise If agreement describes sharing of profits, but

losses are silent, then losses are shared in same proportion

If agreement states sharing of losses, but is silent as to profits, then profits are shared equally



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Right to Compensation and Reimbursement

UPA provides that no partner is entitled to remuneration Implied partners will devote full time and

service to partnership Partner entitled to indemnification

Partner to be reimbursed for expenditures incurred on behalf of the partnership



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Right to Return of Loans and Capital

Partner entitled to repayment of loan Right is subordinated to claims of creditors

who are not partners Partners entitle to have capital

contributions returned at termination of partnership Right is subordinated to rights of creditors



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Right to Information

Partner has right to true and full information From any partner All things affecting partnership

Partner has a duty to provide information Partnership books must be kept at

partnership’s principal place of business Partners have absolute right to inspect and copy

records



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Duty of Duty of LoyaltyLoyalty

Duty of Duty of ObedienceObedience

Duty of Duty of CareCare

Duty to Duty to InformInform

Duties Among Partners



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Duty of Loyalty

Duty that a partner owes not to act adversely to the interests of the partnership.

Duty is imposed by law Cannot be waived. In case of conflict between partnership

interests and personal interests, partner must choose the interest of the partnership.



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Partners breach their duty of loyalty if they:

1. Self-deal with the partner-ship without permission

2. Usurp a partnership opportunity

3. Compete with the partner-ship without permission

4. Make secret profits from partnership business

5. Disclose confidential partnership information

6. Misuse partnership property

7. Make other breaches of their fiduciary duty



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Duty of Care

Partners must use the same level of care and skill that a reasonable person in the same position would use in the same circumstances.

A breach of the duty of care is negligence. A partner is liable to the partnership for any

damages caused by his or her negligence.



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Duty to Inform

Duty partner owes to inform his or her co-partners of all information he or she possesses, that is relevant to the affairs of the partnership.

Knowledge is imputed to other partners.



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Duty of Obedience

Duty that partners must adhere to the provisions of the partnership agreement and the decisions of the partnership.

Partner who breaches this duty is liable to the partnership for any damages caused by the breach.



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Right to an Accounting

Partners cannot sue partnership They may bring an action for an accounting

Formal judicial proceeding in which the court is authorized to:

Review the partnership and the partners’ transactions, and

Award each partner his or her share of the partnership assets



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Tort Liability

Partnership is liable for the tortious act of a partner, employee, or agent that is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners. Both negligence and intentional torts covered



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Joint and Several Liability

Partners are jointly and severally liable for tort liability of the partnership. i.e., the plaintiff can sue one or more of the

partners separately. If successful, the plaintiff can recover the entire

amount of the judgment from any or all of the defendant-partners.

Release of one partner does not discharge the others.



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Contract Liability

Partners are jointly liable for contracts and debts of partnership.

Third party must name all partners in suit. If suit does not list all, judgment cannot be

collected. If one is released, all are released.

Successful third party may collect judgment against any or all partners. Partners may seek indemnification if they pay more

than their share.



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Summary: Personal Liability of General Partners

Issue Joint Liability Joint and Several Liability

Type of lawsuit

Contract action Tort action

Defen-dants Plaintiff must name all partners as defendants

Plaintiff can sue partners individually

Recovery If successful, the plaintiff can recover the judgment against all or any of the defendants

If successful, the plaintiff can recover the judgment against all or any of the named defendants

Indemni-fication

Partner who pays judgment can recover contribution from other partners for their share of the judgment

Partner who pays judgment can recover contribution from other partners for their share of the judgment



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Liability of Incoming Partners

New partner who is admitted to the partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of his or her capital contribution.

The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner.



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Dissolution of General Partnership Defined as:

“Change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business”.

Partnership for a term For a fixed duration Until event occurs Terminates automatically at end of time or when

objective accomplished. Partnership at will

Partner may rightfully withdraw and dissolve partnership at any time.



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Winding-Up

Process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership.

The surviving or remaining partners have the right to wind-up the partnership.

A bankrupt partner cannot participate in the winding-up of a partnership.



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Notice of Dissolution

Terminates partners’ actual authority to enter into contracts or act on behalf of partnership

Notice must be given to certain third parties Third parties who dealt with partnership must be

given actual notice. Third parties who had knowledge of partnership

must be given actual or constructive notice. Third parties who had no knowledge owed no

notice. If no notice given, apparent authority to continue to

bind partnership



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Distribution of Assets

Upon the winding-up of a dissolved partnership, the assets of the partnership are distributed in the following order :

1. Creditors (except partners who are creditors)

2. Creditor-partners

3. Capital contributions

4. Profits



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Wrongful Dissolution

Partner has power to withdraw at any time, but may not have the right to withdraw. Withdraws before expiration of term Withdraws before occurrence of event

Partner is liable for damages caused by the wrongful dissolution of the partnership.



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Continuation of Partnership after Dissolution

Remaining partners have right to continue after dissolution

Continuation agreement Sets forth events that allow for continuation, amount paid

to out-going partners, and other details. Old partnership dissolved and new partnership

created Creditors of old partnership become creditors of new

partnership Have equal status with creditors of new partnership



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Liability of Outgoing Partners

Dissolution of partnership does not discharge liability of outgoing partners for existing partnership debts and obligations



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Right of Survivorship

Upon the death of a partner, deceased partner’s right in specific partnership property vests in the remaining partner or partners

Does not pass to heirs or next of kin Value passes to beneficiaries and heirs

Upon death of last partner, rights in specific partnership property vest in the deceased partner’s legal representative



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Chapter Four – Recap

1. Define general partnership and describe how general partnerships are formed.

2. Explain the contract and tort liability of partners.

3. Describe how a partnership is dissolved and terminated.

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